TREASURIES-Powell's upbeat economic view flattens U.S. yield curve

Reuters Staff

6 Min Read

* Powell sees U.S. economy strengthening since December
* Powell downplays risk signaled by a flattening yield curve
* Powell sticks to Fed's gradual rate-hike stance
* U.S. durable goods fall again, consumer mood hits 17-year
high
(Updates market action, adds quote)
By Richard Leong
NEW YORK, Feb 27 (Reuters) - The margin between U.S.
shorter- and longer-dated yields narrowed on Tuesday after
Federal Reserve Chairman Jerome Powell said data since December
pointed to a strengthening economy and his confidence had
increased that inflation will rise.
His outlook spooked traders who now fear the U.S. central
bank might raise key short-term borrowing costs four times in
2018, one more rate increase than they had previously thought.
A faster path of Fed rate hikes will likely keep a lid on
longer-dated yields.
Powell expressed his view during the question-and-answer
section of his first semi-annual economic testimony as Fed chief
before the House Financial Services Committee.
"The view is that he reinforced the view of a March rate
hike and added to expectations for a higher number of rate hikes
going forward," said John Canavan, market strategist at Stone &
McCarthy Research Associates in New York.
Futures market implied traders have almost priced in the
chances of the Fed's next rate increase at its March 20-21
meeting.
Before Powell's Q&A, Treasury yields were lower on his
prepared remarks for his House appearance, which suggested no
departure from the Fed's current stance set by his predecessors,
Janet Yellen and Ben Bernanke, analysts said.
"The (Federal Open Market Committee) will continue to strike
a balance between avoiding an overheating economy and bringing
... price inflation to 2 percent on a sustained basis," Powell
said in prepared remarks.
Powell will complete his semiannual testimony before the
Senate Banking Committee on Thursday.
The benchmark 10-year Treasury yield was 2.901
percent, up 4 basis points from late on Monday, while the
two-year yield was 2.266 percent, over 3 basis points
on the day.
The rise in longer-dated yields was capped by safe-haven
bids stemming from a sell-off on Wall Street as Powell's
economic outlook stoked rate-hike worries.
The spread between five-year and 30-year Treasury yields
contracted by 3 basis points to 51 basis points.
It remained above the decade low of 40 basis points reached on
Feb. 1, Tradeweb data showed.
Some analysts have been concerned the yield curve may
eventually invert where shorter-dated yields are higher than
longer-dated ones, which has often preceded previous U.S.
recessions.
In his House testimony, Powell, when asked, downplayed
concerns about a curve inversion.
"I don't look at the current yield curve situation as a
problem," he said.
On the data front, domestic durable goods orders fell 3.7
percent in January, more than what analysts had forecast.
On the other hand, the Conference Board's gauge on U.S.
consumer confidence rose more than expected in February to its
strongest level since November 2000.
February 27 Tuesday 3:19PM New York / 2019 GMT
Price
US T BONDS MAR8 143-21/32 -18/32
10YR TNotes MAR8 120-108/256 -13/32
Price Current Net
Yield % Change
(bps)
Three-month bills 1.645 1.6749 -0.002
Six-month bills 1.83 1.8727 -0.002
Two-year note 99-248/256 2.266 0.036
Three-year note 99-128/256 2.4257 0.050
Five-year note 99-208/256 2.6653 0.060
Seven-year note 99-120/256 2.8342 0.057
10-year note 98-176/256 2.9026 0.044
30-year bond 96-184/256 3.1704 0.016
YIELD CURVE Last (bps) Net
Change
(bps)
10-year vs 2-year yield 63.50 -0.10
30-year vs 5-year yield 50.50 -3.70
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 27.75 0.75
spread
U.S. 3-year dollar swap 24.25 0.25
spread
U.S. 5-year dollar swap 11.50 0.50
spread
U.S. 10-year dollar swap 1.25 1.25
spread
U.S. 30-year dollar swap -18.50 1.75
spread
(Reporting by Richard Leong; Editing by Jonathan Oatis and
Susan Thomas)